Buying a home for the first time can be challenging—but we’re here to help. Griffin Funding offers premium FHA loans designed to make home-buying dreams a reality for first timers. Read on to find out what an FHA loan is, how to qualify for an FHA loan, and more important information about this advantageous mortgage option.
The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and conditions and to provide an adequate home financing system through insurance of mortgages. Families that would otherwise be excluded from the housing market were finally able to buy the homes of their dreams under this program.
An FHA loan allows you to buy a house with as little as 3.5% down, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first-time buyers (or anyone hoping for a low down payment) to buy a home.
Note that the FHA does not make home loans—similar to how VA loans are guaranteed by the Department of Veteran Affairs—the FHA simply insures them. If a home buyer defaults, the lender is paid by the FHA. This means that lenders have the security they need to offer this mortgage option to homebuyers who may struggle to make higher down payments, or who have lower credit scores.
The Federal Housing Administration (FHA) is a branch of the Department of Housing and Urban Development (HUD)—the part of the US government that oversees fair housing for Americans. The FHA insures loan products offered through private lenders to allow more home buyers to have access to high-quality loans at affordable rates. This is why FHA loans have lower interest rates.
The main advantage of FHA home loans is that the credit qualifying criteria for borrowers are not as strict as conventional financing. Lenders backed by the FHA allows a borrower who has had a few credit problems, or those without an extensive credit history, to buy a home.
Note: At least two years must have passed since any bankruptcy event, unless some other extenuating circumstances can be proven.
Conventional financing, on the other hand, relies heavily upon a borrower’s credit score. Credit scores are a rating given by a credit bureau (such as Experian, TransUnion, or Equifax) that rates your reliability when paying back loans. Those with rockier pasts when it comes to loan repayment often have lower credit scores, making it difficult to secure financing.
FHA-backed mortgages give lenders peace of mind, even in cases where borrowers have lower scores, making the loans easier for those borrowers to secure.
There are a few different types of FHA loans that borrowers may want to consider as they review their options.
FHA’s section 203(k) program can be used for both the purchase of a new home or the refurbishment of an existing home. Griffin Funding offers both limited and standard renovation lending.
HECM loans, usually called reverse mortgages, allow borrowers to receive cash based on their home equity. The amount borrowers can receive is based on the appraised value of their home. With an HECM, payments are paused until the home is sold, then full payment must be made with the interest that has accrued over time.
The 245(a) program is built for optimistic borrowers who expect a gradual increase in their earnings. Loan payments start out low, then slowly increase over time. This can help make loans affordable earlier on, and can shorten the term of the loan.
As with other conventional mortgages, FHA loans allow both fixed and adjustable interest rates. Fixed-rate loans will remain the same throughout the term of the loan (unless refinanced into an adjustable loan). Adjustable-rate loans have a fixed interest rate for a set period, but then may fluctuate at the lender’s discretion, often in response to broader market factors.
Qualifications by lender, as these loans are offered through private lenders and not the FHA itself. However, the FHA does offer FHA mortgage qualification guidelines for lenders to follow, including:
At Griffin Funding, we strive to make FHA loans available to a wide variety of borrowers by offering flexible underwriting terms with lenders that we trust. Speak with a representative today to find out more about your eligibility.
Generally, a bankruptcy will not preclude a borrower from obtaining an FHA loan entirely. However, a borrower should have reestablished a minimum of two credit accounts (such as a credit card, car loan, etc.) and waited 2 years since the discharge of a Chapter 7 bankruptcy—or have a minimum of 1 year of repayment with a Chapter 13 (the borrower must also seek permission from the courts to allow this). Furthermore, the borrower should not have any late payments, collections, or credit charge-offs since the discharge of the bankruptcy.
Although rare, if a borrower has suffered through extenuating circumstances—such as surviving cancer but having to declare bankruptcy because of the medical bills—special exceptions may be made. However, this is done on a case-by-case basis.
It is important to understand that loan approval is dependent on the documentation you provide. To ensure a smooth transaction, it is crucial that you have all your documentation in order before you submit your initial application for the loan.
For an FHA loan, Griffin Funding requires that your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together and referred to as PITI.
Example:
Your total monthly costs, adding PITI and long-term debt, should be no more than 41% of your gross monthly income. Long-term debt includes such things as car loans and credit card balances.
Example:
The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.
FHA loans offer many benefits, however, like any financial product, there are some drawbacks to consider. One downside is that FHA loans typically have higher mortgage insurance premium costs.
FHA loans also have strict requirements surrounding housing standards. Homes must meet FHA health and safety qualifications, and only primary residences are eligible. Additionally, FHA loans have limits on the value of the home—read about non-QM loans here for more flexible financing options that might better suit your needs.
FHA loans are an excellent option for many first-time homebuyers and those with lower credit scores. If you think an FHA loan might be a suitable option for your home financing journey, reach out to a Griffin Funding representative, who will be happy to talk you through your options. Griffin Funding is not HUD approved and is not a direct lender for FHA loans. Griffin Funding acts as a mortgage broker on FHA loans and brokers FHA loans to reputable, competitive, FHA HUD approved lenders.
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